The importance of family businesses to the global economy is undeniable. According to the European Commission, they account for more than 60% of all companies in Europe and the Americas and about 50% of employment. But for many, succession planning can be a cause of anxiety, and there are many misconceptions around what is involved.
Family business leaders often believe it is their responsibility to secure the successor, treating all family members fairly. The truth is, succession planning is a process involving many stakeholders, some of whom are family members, with a possibility that a successor could be appointed from outside the family.
EY’s family business portal can help guide a family business through the process of developing their own family charter, which defines roles and responsibilities, to facilitate the process of finding the right successor.
Balancing the interests of the business and family members is tough. It is important that a definition of what qualifications and personality attributes are required by a successor is set early. Defining this in the charter should ideally be done as soon as possible and not during the process of succession.
Not every family business will survive. Many do fail, sometimes due to differing family interests or the inability of the next generation to grow the business, but the greatest contributor to family succession failure is unmanaged expectations. Other contributing factors include a lack of transparency or undefined family governance to explain the process and outline the criteria for a successor. A clear family charter can mitigate all these threats.
The current entrepreneurial generation should set themselves an age limit for retirement — perhaps 65 or 70 — and stick to it. There needs to be a clear point in time when the current generation intends to step down, and then you can start the process of succession planning at least two years in advance. Setting this age helps to manage the expectations of the succeeding generation, and also allows the business to prepare for change.
From the perspective of the leaving generation, there are often questions: “What should I do? What is my role or responsibility?” Looking for a purpose for the leaving entrepreneur is an important part of succession planning, and often the former CEO will shift to a supervisory function as a board or council member.
Whether a family member or non-family member of the business provides succession, a robust charter, clearly defined expectations and transparent communications are vital to the continued success of the company under new leadership.
Peter Englisch, Global Leader, Family Business Center of Excellence, EY